Template:GMSLA compensation for mismanagement: Difference between revisions

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 ===Retrospective compensation for corporate mismanagement===
-An interesting question arises as to whether settlements or judgments reflecting corporate malfeasance by issuers of {{gmslaprov|Loaned Securities}} or {{gmslaprov|Collateral}} — and which manifest themselves in compensation payments to shareholders of record as of a certain date (and which falls during the term of a {{gmslaprov|Loan}}) — qualify as “{{gmslaprov|Income}}” under the {{gmsla}} that must be manufactured back to the {{gmslaprov|Lender}}.
+An interesting question arises as to whether settlements or judgments reflecting corporate malfeasance by issuers of {{gmslaprov|Loaned Securities}} or {{gmslaprov|Collateral}} — and which manifest themselves in compensation payments to shareholders of record as of a certain date (and which falls during the term of a {{gmslaprov|Loan}}) — qualify as “{{gmslaprov|Income}}” under the {{gmsla}} that must be [[Manufactured payments in respect of Loaned Securities - GMSLA Provision|manufactured]] back to the {{gmslaprov|Lender}}.
 Such disputes can take years — decades even — to iron out, can take any number of different forms and, if viewed as {{gmslaprov|Income}}, represent a significant tail risk in a {{gmslaprov|Borrower}}’s trading book.
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 On the other hand — and it pains me somewhat to lay some {{t|Latin}} on you, but I will — the [[ejusdem generis]] rule of interpretation says where general words (here, “distribution of [[Any type, kind or nature|any kind whatsoever]]”) follow specific words (“[[Dividend - Equity Derivatives Provision|dividends]], [[interest]]”), the general words are cover only objects similar in nature to those specific words. So the distribution should be of the same nature as interest or dividends.
-So, is  a court-mandated compensation for historical corporate malfeasance “of the same nature” as  voluntarily declared dividend, intended by its [[issuer]] to reflect its own satisfactory stewardship of the corporation’s commercial affairs? The [[JC]] would argue that it is not. Quite the opposite, in fact: if we take it as read that one borrows {{gmslaprov|securities}} to [[Short sell|short-sell]] them in the market we see that the [[short-seller]]’s exact view is that the {{gmslaprov|securities}} are overvalued: this is consistent with the theory that their issuer is mismanaging the company. The [[Short sell|Short-seller]] bets that the truth will eventually come out and, when it does, the shares will fall in price. It can then buy them back, take a profit, and deliver them back to the {{gmslaprov|Lender}}.
+So, is  a court-mandated compensation for historic corporate malfeasance “of the same nature” as  voluntarily declared [[Dividend - Equity Derivatives Provision|dividend]], intended by its [[issuer]] to reflect its own satisfactory stewardship of the corporation’s commercial affairs? The [[JC]] would argue that it is not. Quite the opposite, in fact: if we take it as read that one borrows {{gmslaprov|securities}} to [[Short sell|short-sell]] them in the market we see that the [[short-seller]]’s exact view is that the {{gmslaprov|securities}} are overvalued: this is consistent with the theory that their issuer is mismanaging the company.
-It can't be right that, where the [[Short sell|short-seller]] is ''so'' right about this the {{gmslaprov|Securities}} issuer is breaching its fiduciary duties to its shareholders, that it must compensate the {{gmslaprov|Lender}} as a result.
+The [[Short sell|Short-seller]] bets that the truth will eventually come out and, when it does, the {{gmslaprov|securities}} will fall in price. It can then buy them back, take a profit, and deliver them back to the {{gmslaprov|Lender}}.
-But this puts the poor {{gmslaprov|Lender}} in a sorry spot. Because it has lent the securities, it is not on the register as of the {{gmslaprov|Income Record Date}}, so however you characterise that compensation payment, it can’t claim if from ''anyone''. “The deal”, it will argue, “is that the {{gmslaprov|Borrower}} should put me in the position I would have been in had I continued to hold the shares. ''I'' wasn’t expressing a view here. I stayed long the economic exposure of the stock. All I wanted was a lending fee.”
+It can't be right that a [[Short sell|short-seller]] who is ''so'' right that such an issuer is actually breaching its fiduciary duties to its shareholders, that it is not entitled to benefit from its bet. Why must it compensate the {{gmslaprov|Lender}} in an extreme case, but not in an ordinary one?
-It is hard not to be sympathetic about this. Were the {{gmslaprov|Borrower}} to have held the shares, it might even be prepared to make that ''ex gratia'' payment on the basis that it was a windfall: it knew the company was rubbish and made its money on the short sale. But there’s the rub: The borrower ''didn’t'' hold the shares. It ''sold'' them. That is why it Borrowed them in the first place.
+True, true, this puts the poor {{gmslaprov|Lender}} in a sorry spot. Because it has lent the securities by [[title transfer]], it is not on the share register as of the {{gmslaprov|Income Record Date}}, so however you characterise that compensation payment, it can’t claim it from ''anyone''.
-So however you look at it, there’s a loser here. But in a sense, remember this is a windfall payment — some public spirited activist has jemmied some extra cash out of a reluctant issuer. Had it not done so no one would have been any the wiser.
+“The deal”, it will argue, “is that the {{gmslaprov|Borrower}} should put me in the position I would have been in had I continued to hold the shares myself. ''I'' wasn’t expressing a view here. I stayed long the economic exposure of the {{gmslaprov|securities}}. All I wanted was a lending fee.”
+It is hard not to be sympathetic about this. Were the {{gmslaprov|borrower}} to have held the securities, it might even be prepared to make an ''ex gratia'' payment on the basis that it was a windfall: it knew the company was rubbish and made its money on the short sale. But there’s the rub: The borrower ''didn’t'' hold the shares. It ''sold'' them. That is why it Borrowed them in the first place. So the {{gmslaprov|Borrower}} is in no better place to claim that compensation from the Issuer than the {{gmslaprov|Lender}}.
+However you look at it, there’s a loser here. But remember this is essentially a windfall payment — some public-spirited activist hedge fund<ref>What? What?</ref> has jemmied some extra cash out of a reluctant issuer. Had it not done so no one would have been any the wiser.